HDFC Bank Ltd (HDB) 2013 Q2 法說會逐字稿

Good evening. Thank you for standing by. And welcome to the HDFC Bank's Q2 FY 2013 results conference call presented by Mr. Paresh Sukthankar, the Executive Director. At this time all participants are in a listen only mode. There will be presentation followed by question-and-answer session. (Operator Instructions). Please be advised this conference is being recorded today. I would like to hand the conference over to Mr. Paresh Sukthankar now. Over to you sir.

Thanks. Good evening everyone. I'll just make a few quick opening remarks. Welcome to the call. I've got Sashi and [Bhavin] with me as well. So we will after the first initial remarks, I will -- we'll perhaps take your questions. Briefly on the second quarter results, the net revenue growth for this quarter has been at 22.2%, taking net revenues to INR5,076 crores. The largest component of net revenues is always is the net interest income which grew by 26.7% to INR3,731 crores.

That does include an element of, apart from the normal net interest income it does include an element of mutual fund dividends which we earned during the quarter. If you knock that off, then the adjusted net interest income growth would have been about 22%, 23% and that came from loan growth of 22.9% and interest margin of 4.2%.

Moving on to the other income, fees and commissions, as again -- as always are the largest component of other income and they grew at 22.4% in the quarter. This is September 2012 over September 2011. And therefore the absolute amount of fees and commissions were at INR1,200 crores as against INR987 crores in the corresponding quarter of last year. The [education and development] revenues grew by about 8%.

And therefore the overall other income growth was a little neutral as compared to the previous year. The operating expense growth was about 23% and the cost-to-income ratio was at 49.4%. Provision and contingencies at INR293 crores were about 20% lower than the INR366 crores in the corresponding quarter of the previous year, and that's reflective of the asset quality piece which I'll touch upon just a minute or two later. And net profit growth was 30.1%, with net profit for the quarter being at INR1,560 crores.

The balance sheet front, the overall balance sheet touched INR377,000 crores, which was a growth of 19.5% from the previous year. Advances grew by 22.9% and touched INR231,000 crores. The retail growth was stronger than the wholesale piece, and therefore, the mix is now 53-47 in favor of retail. Deposit growth was at 18.8%, with total deposits at INR274,000 crores. The savings deposits grew by 14.7% to about INR79,000 crores. There was a one-off current account outstanding as of September 30, so if you adjust for that CASA will be at about 45.9%.

Half year profits were also up 30.3%, and therefore, for the half year ended September 30, 2012, the profits were -- the net profit was INR2,977 crores. Incidentally, since the half year results have been audited. This is added back to a network for capital adequacy purposes. As a result, the capital adequacy ratio for the -- as of September was -- the total capital adequacy was [17%], Tier-I was at 11.4%.

During the quarter, we also added about INR3,500 crores of Tier-II capital, so the improvement to the capital adequacy is partly driven by the year-to-date profits and partly driven by the Tier-II capital that we had raised in the month of August.

Our branch network is now at 2,620 branches, which is roughly an addition of about 500 branches roughly from September of last year. Number of ATMs are at 10,300 and our presence is now in about 1,450 cities.

Finally on asset quality, gross NPAs are down from 1% to 0.9%, net NPAs at 0.2%. Our coverage ratio based on specific provisions alone is at 82%. Our restructured loans remain at 0.3% of gross advances.

So those are some of the key numbers. You probably had a chance to look at these numbers even earlier but I just thought I'll quickly rush through some of those, and we'll be happy to take your questions.

[Now we] can throw the call open for questions now please.

(Operator Instructions) [Rakesh Kumar].

Good evening, sir. Good set of numbers and good balancing act the bank has done. Just a question on this operating expenses front. Employee expenses has come down sequentially. So what could you explain that? Hello?

Sorry, I didn't get the question.

The employee expenses has come down sequentially, so just wanted to understand what was the reason behind that.

Sure. Yes, we had some one-off expenses in the fourth quarter -- in the first quarter, which were not there in the second quarter. So that's the only reason. But otherwise if you look at it, lastly the expenses have been more or less stable in the second quarter, if you adjust for that.

Secondly on the credit growth side, actually the retail part, as you've already mentioned, it has grown at much faster pace. And secondly within that, we see that like barring CV like other segments like credit card, gold and (technical difficulty) do you have grown at quite higher pace? So, like internally, have we set any limit that like this could be the composition of a particular sub-segment going forward or like in order to balance out margin, we would continue increasing the composition of the sub-segments going forward as a result?

I think we're not trying to target a certain mix of retail loans. What we're looking at is we have a certain positioning in each of these products. We know what segments, what credit appetite we have for each of those segments and what the demand is for each of these products. So within the parameters that we are willing to work on in the pricing, obviously depending on how the demand is, there are different (technical difficulty). And although, therefore, you have from time to time some product growing slightly faster than the other, the broad mix has really not changed. In this quarter, the only slight difference is that, because in the first quarter, we had not purchased any home loans as yet. In this quarter, we've purchased about INR2,500 crores which is in respect of the origination that we had done in the first and the second quarters. So other than that the -- if you look at the rest of the mix change, it really reflects the underlying demand more than anything else. If you look at something like auto loans where the growth was about 17%, that's slightly slower than perhaps some other products, because the underlying sales of card might have been that much -- little more muted than what it was earlier.

On the other hand, (technical difficulty) the growth in home loans or business banking or (inaudible) has been little healthier at 20% odd growth rates, because again, those have continued to grow on a ongoing basis. So there are -- different growth rates, but I don't think that a conscious move would change the mix in any particular way.

Would you have any target in your mind for the year-end of loan composition?

Between retail and corporate? No. We are pretty agnostic about what the ultimate mix might be at the end of the year. We would rather focus on both the segments and then depending on how the competitive environment is and what pricing we are able to access. As long as with -- as long as the retail loan that we're putting up, (inaudible) appetite for those products in retail. And within corporate, those are the ones that we are comfortable with from a risk-return perspective. We would be pushing both and the ultimate mix will really be a function of what comes on the books by the end of the year.

Thanks. And that's it for me. Thank you.

Thank you, sir. [Mr. Manish Oswal, Choksey Security].

Good evening, sir. My question on provision side, the provisions were down 39.9% quarter-on-quarter to INR293 crore. So could you give the break off of the provision in terms of general specific (inaudible)? And number two, we have seen that the bank has been fairly stable and strong (technical difficulty) last few quarter, but the provisioning line item that (technical difficulty) has been -- has seen the large volatility. Could you explain the stable asset quality and the volatile provision line item?

So let me put both those piece into perspective. One is the (technical difficulty) breakup just now (technical difficulty) provisions are just under INR300 crores, of which INR125 crores are general and floating and the balance are specific provisions. So, if you look at the specific provisions, they are reflective of whatever the gross NPA coverage, gross NPA [ratios] have been there. And therefore, in absolute terms, are probably very similar to what we have seen in the previous quarter as well, in the June quarter as well. The coverage ratio on the NPLs remains at about 82% as far as specific provisions to gross NPAs are concerned.

As far as the general provisions which we've been creating from time to time, those are a function of what the growth rate is in the loans during the quarter. So whatever has been the increase in standard assets or in terms of loans during the quarter, depending on the category of loans, there has been an increase in the general provisions.

As far as our overall floating rate -- floating provision coverage now is concerned, if you look at the total coverage ratio, which means they are going beyond the specific provisions [are bound to] specific general and floating, we now have reached in fact a level which is a little over 200% and in fact, in percentage or in basis point terms, we will therefore have a general provisioning level of about 40 basis points, 45 basis points. And another floating provision which is about, almost 70 basis points. So effectively if you look at the total provision that we are holding between 82% of the 90 basis point of gross NPAs plus the general and floating, that is the level that we have created over the last few quarters.

So at this point of time, we would be comfortable making provisions based on whatever is the incremental slippage, the gross increase in standard assets as a result of whatever is as a function of the loan growth and the requirements from an [IVR] perspective for general provisions and then comes the [good] provision that we would make from time to time to reach a certain coverage level.

Secondly, your net interest income, also improved some dividend income from the mutual fund holdings.

That's right.

So what is the amount of that increase?

It was approximately just under INR100 crores.

INR100 crores.

Yes.

And the fee income growth has been growing faster [than the balance sheet] last few quarter, but this quarter we have seen that (technical difficulty) there in the fee income. So going forward, would you expect the fee income would (technical difficulty) balance sheet growth?

We've clarified several times that this comparison of fee income to balance sheet growth has very little to do with each other, because most of our fee income has got nothing to do with our loan growth or our balance sheet growth. In fact, this time our fee income has actually marginally outpaced the balance sheet growth, but again, it's got nothing to do with (technical difficulty) I mentioned earlier. The only part of fees which are related to loan growth is from little bit of processing fees on some of the retail loans, but other than that what has helped fee income remain or actually pick up in growth rate this quarter has been the fact that there has been a bounce back in third-party sale, a part of sales of course the fact that in the last few quarters it was muted because of the base effect and because of the change in regulations. Now we have had a complete cycle (technical difficulty) four quarters of the commissions at the regulate -- exchange rates in terms of regulation.

And we have seen now the volumes having picked up in the last quarter in particular. So -- and of course, there is a slight mix change as far as insurance is concerned towards term products which again also helps in terms of commission. So one driver of slightly faster fee growth has been the third-party commissions. Other fee growth across a range of retail products has also remained fairly healthy. There was a negative impact on account of changes in regulations for the acquiring commissions on debit cards, which had a marginal negative impact on one of the fee lines in retail. But despite all of that, the fees and commissions growth in the quarter was just over 22%.

(technical difficulty) currently. So --

(technical difficulty) I couldn't hear you.

Your CD ratio, the CD ratio has increased significantly quarter-on-quarter, maybe you raised the capital of [INR800,000 at tier 2]. But broadly last few quarters, the CD ratio is (technical difficulty) so when do you see this to trend down?

No, I don't think -- first of all, again, I think this is a point that I have made on several calls. CD ratio has to be (technical difficulty) in the light of what is the (technical difficulty) that is the loans apart from being funded by deposits, is it coming from borrowings or are we in the (technical difficulty) funding market to try and fund our balance sheet. That is not the case. So I think I have been categorical about this. And I'd like to repeat it [in any time] that you answered (technical difficulty) in respect of the fact that we would raise Tier II capital.

So we remain extremely comfortable from a liquidity perspective. In fact, the only reason why (technical difficulty) because we've had surpluses beyond what we were pushing out in terms of our loan growth. So as far as the CD ratio is concerned, it is a function of really what our loan growth is and what our deposit growth is. Both these remain at levels that we are comfortable with and which are ahead of the system. And from a liquidity perspective we remain extremely comfortable and I think you need to look at this on an overall basis rather than early in isolation.

Okay. And lastly on -- reason for sharp fall in the ForEx rate (technical difficulty) press conference that it is a lower volatility in the ForEx market that (inaudible) income. Secondly is there any component of proprietary gain in previous quarter, so there will be some sequential drop, sharp sequential drop in line item.

So, in the first quarter of the year, that is in the sequential previous quarter, there was an element of trading revenue. See the higher volatility helps in two ways, one is of course, some proprietary revenue, but a proprietary portion of our FX gains typically are not more than about 20% of the total FX revenues. So to the extent that that would have been (technical difficulty) would certainly have contributed to these -- like the lower growth rate.

But also the low volatility means that the spreads on the customer side would be slightly lower. And what we have seen is that since the previous two three quarters there had been significantly higher concern on the rupee and volatility in the currency, the customers may have also perhaps advanced their hedging needs for the year. So to some extent perhaps there has been a sort of accelerated growth earlier on and therefore some of the covers that they would have taken on a more periodic basis or across two, three quarters might have been advanced.

So there might be some loss of volume because of these flows -- from a customer flow point of view might have already been hedged. Combination of factors, of course the FX line is a line that one cannot see purely on a [quarter-over-quarter] basis, one has to look at it on a annualized basis. But clearly this quarter was a soft quarter and (technical difficulty).

And secondly sir, two data point, one is that what is the risk weighted asset number and secondly employee addition during the quarter and the end of quarter, what is the employee strength?

Risk weighted assets are at INR2,73,000 crores and the number of employees are around INR67,000 crores -- 67,000 employees.

Okay, thank you so much and all the best [Paresh].

Thank you so much.

Thank you sir. Kashyap Jhaveri, Emkay Global.

Yeah, sir, congratulations on set of numbers. One question on yield on advances, you know, if you could throw some light on how has that moved QonQ, has it declined quarter-on-quarter basis, and if yes what could be the reason for that?

Well, I'll give you (technical difficulty) because as you know we sort of don't put out the actual numbers on advances and so on, but from -- on a sequential basis from June quarter to this quarter there has been a decline of about 20 basis points in terms of the average yield on advances. And that's primarily being a function of what has happened in terms of the raise. We also, if you remember at the -- in June, we had dropped our base rate -- end of June in fact we had -- and I had mentioned this in the call that we did for the last quarter that our base rate which is at 10% was dropped to 9.8% as of the end of June.

So this quarter would have seen the [20] basis points lower yield on that part of the balance sheet, which is linked to the base which is roughly about 20%, 25% of the loan book. So that would have caused some reduction in -- and there has been continued, you know, given that deposit rates have been coming down, given the changes in monetary policy, there has been a slight downward bias to interest rates both on loans and on deposits.

Okay, and just one question -- another question on the loan growth, I mean, we have been highlighting that we probably might grow couple of percentage points ahead of the system, now this quarter y-on-y growth has been much more than that. So what would be the target for the year and do we still stand a couple of percentage points for the systemic rates?

Yes, there is -- you're right and this quarter, if you look at it sequentially, it looks as if they're growing much faster than the system. Like I said there is one distortion caused by the fact that the home loans came in only now for the full six months, right. I mean, some of it should have come in the first quarter and some of it would have come in the second quarter as you know because we were given the new securitization guidelines. We had to rework the arrangement before we could make the purchase. That INR2,500 crores came in, in fact only towards the end of September. So that is causing some distortion in terms of growth rate.

We also had some increase which is also because some loans that we participated out, the IBPCs that we have done, some part of it that we have done towards the end of the pervious financial year those after six months to get over, those came back. So, again, that caused a little bit of distortion.

So, the fact is that if you look at the system loan growth at about 16.5%, that is as of September, we still believe that we would typically grow a few percentage points more whether that's two percentage points is three or four or five or anywhere around that is tough for us to predict at this point of time. We are certainly comfortable that we will grow faster than the system by a few percentage points. The actual growth rate of the system will be a function of (technical difficulty) growth rate and the overall demand in the market. So, the exact number, one, we don't have a guidance, but I think we'll unfold along the way.

Okay. And just one last question on branch additions, of whatever branch addition has happened over last about two quarters, what would have been, let's say, I mean I know it's a small number, but what could have been, let's say, below Tier 2 towns?

Almost all of them.

All of them.

All of them would be in the [Tier 3, 6, or that would appear 6] cities.

This is for last two quarters?

I'm talking about -- yes, in the first two quarters of this (technical difficulty).

Okay. Okay. And in March quarter where we ended about 340, any ballpark number that you would have (multiple speakers).

(technical difficulty) about 70%-30% between the (inaudible). So, we would have about 30% which might have been in Tier 1, Tier 2 cities.

Sure. In case any further question, I'll probably get back in the queue.

Sure.

Thank you.

Thank you.

Thank you, sir. Amit, Religare.

Yes, I just a couple of questions, one is that, see now that savings bank deregulation, whichever -- whatever has happened sufficient time (technical difficulty) balanced growth is still holding up well. So any specific steps that you guys have undertaken post that announcement helping you to grow this balance? That is the first question.

I think that (technical difficulty), one of course is that we've always believed that from a customer point of view for savings account decisions pricing is not the main driver or such an important driver of the decision. So the fact we have a strong brand, we've got a wide product range, we believe we offer good service levels, I think that proposition still remains the main proposition when you try and market for or you try and acquire savings accounts.

From a distribution point of view clearly the significant increase in the number of branches also helps because obviously savings account customers will usually come to a bank branch which is within a certain vicinity or a certain catchment area. So that has been helping.

Apart from, of course, all of these factors which focus on (technical difficulty) new savings account customers, there is a focus on increasing the balances in existing customers. And that really is -- that strategy is built around cross selling several more products and making this savings account the main savings account for the customer, and I think that has been successful as well. So, I wouldn't say that it's a completely -- it's a strategy that has changed after the deregulation. There's no doubt that there is an element or there are some segments which are a little more price sensitive or which might be competing on price, but the larger part of the saving account business is based on all these factors which will remain fairly strong.

And how are you faring in terms of new customer acquisitions since last two, three quarters because your balances show that those are strong, but --

Yes, in terms of -- in fact the new number of savings accounts as well, we have sort of pretty much [got due] to cruise along. We, of course, on an ongoing basis adding customers. We've sort of managed (inaudible) customers and so on, but both -- so not just in terms of balances but in terms of numbers as well, number of new savings accounts being opened. We've continued to see a reasonably stable growth rate.

So, (technical difficulty). Okay. So the other question is that can you explain the loss on valuation investment, basically one would have assumed that this quarter there should have been gains.

I am sorry, your voice is sort of --

Can you explain this loss on the evaluation or the treasury loss that you have booked this quarter?

Yes, yes absolutely. So this, as I mentioned earlier when I was talking about the net interest income, there was an element for dividend income that we received, post the dividend income being received, the NAV of the debt fund is obviously lower. And therefore this is the mark-to-market on the debt investment after having received a dividend.

So, really the -- though there is a loss in this line, there is a dividend income which has been (technical difficulty). So this is really an obstruct for [PAT] and obviously generating whatever returns that the investment has generated. So that's really what this is.

Okay. What I wanted to basically understand was is there any credit cost kind of loss which has been (multiple speakers)?

No, the credit costs are all in the provisions line. There is no loss in terms of loss on sale or diminution in the value of investments in that particular line. That is entirely on account of the mark to market on debt -- mutual fund investments after having received dividends.

But just for understanding that suppose if there is a loss on the investment side in terms of like a credit cost (technical difficulty) loss on the investment book --

Yes.

-- does it get accounted here or it gets accounted in provisions?

It gets accounted in the provisions.

Okay.

Provisioned in the value of investments on account of credit cost like in other loan loss or anything would come in provision (technical difficulty).

Okay, oaky, thank you.

You're welcome.

Thank you, sir. Brian, KBW.

Hi, thanks. I just had a -- I was hoping you could give us some guidance on how you see the outlook and particularly in light of these reforms announcements that we have had, internally is your risk appetite increasing and then are you looking to sort of maybe be a little bit more -- looking to sort of take on a bit more risk to impose the retail and the corporate portfolios or do you think that it's just too early to make that decision and that on the ground things are still pretty difficult?

I'd put it in a slightly different way. I don't think our risk appetite is purely a function of the sort of sentiment or the expectations in the marketplace, real or the financial markets. What really is happening is as a result of the reforms or the more positive sentiment or lower interest rates or the markets feeling much more positive about the political and economic environment, if there is a higher level of economic activity, there is higher investments so there are higher growth for manufacturing companies that would translate to a higher GDP growth.

And we have seen that as a combination of working capital and CapEx, the higher GDP growth does translate into higher system loan growth. And therefore our loan growth which is a function of the base system or industry loan growth plus a certain delta, that goes up not because the delta or system is going to be changing but because the base system loan growth (technical difficulty). So for instance this is as against 5% economy growth at 5.5% or 5.7%, chances are that loan growth in industry is not 15.5% or 16% but maybe 16.5%, 17%.

And if for the sake of argument we were to grow 3%, 4% faster than that, then obviously in absolute terms, we would grow a little faster as a result of the all the factors that you just mentioned. But I don't think there has been any review of any of the credit parameters or we are not looking to consciously take on higher risk purely based on environment. We sort of define our appetite from a customer segment and credit parameters and credit criteria point of view based on our experience for various customer segments and product segments over a period of time.

Okay, thanks. That's fairly clear. And if I could ask one more question please, I think I've seen a headline on Bloomberg stating that you have seen some weakness in, I think it's the commercial vehicle portfolios and also the construction equipment financing portfolios. Could you give us a bit more color on what's going on there and how this impacts your sort of growth outlook in these portfolios and particularly given that the commercial vehicles portfolio has been quite a strong source of growth in the last few quarters?

I haven't seen these -- I haven't seen what the comment is, but I think that this has probably been a point which I made during the TV interview earlier, I think the point -- the question was that there is a reaction to a question that within the retail asset space which are the products which have shown any sort of movement or deterioration in asset quality. And I started off by making the point that overall for the bank as a whole as well as for retail, our actual losses still remains within, which means below what the expected losses are for each of those products. And when I say expected losses that's the loss that you have priced in each of those loan products.

I then made the point that from the lowest point that we had hit for any of these products, we have seen an uptick over the last two or three quarters in fact for a couple of products. So we have not had the lows, but even with the increase we are still at less than average -- expected -- less than average losses for those products related to what we had expected.

In that connection I had mentioned (technical difficulty) which of these products and I have said that certainly those which are more vulnerable to a cyclical downturn as the economy slows down into be products like commercial vehicles, construction equipment, S&E type lending.

And while the other products which typically tend to be vulnerable from a cyclical point of view are secured products, we have not seen any deterioration as yet on the unsecured products. So I don't think we have had any sort of major spike such that we would have to change our product strategy.

Would we have to continuously tweak our strategies in various products, including the two or three that we mentioned earlier, yes, that we would do, but at this point of time we are fairly comfortable with managing the risk reward and the growth rates vis-a-vis the risk appetite that we have.

Okay. Thank you. That's quite clear. And just a final question, the mutual fund dividend that would not be included in the net interest margin calculation, is that correct?

It would be, so that would have about (technical difficulty) basis points impact on the net interest margin. The margin would still remain at 4.2% even if you had knocked off those couple of basis points.

Okay. Great. Thanks so much.

Thank you, sir. Shri Shankar, Tata Securities.

Yes. Paresh, good evening.

Good evening.

A quick question, if I look at the last 15 quarters of your performance this is the first that I've seen a decline in operating profit. Paresh, what is happening around? [Has the impact been up] -- net profits are better this quarter effectively because on record of lower provisioning, that's one side.

And earlier when you mentioned about yield on advances, I understood that it's down [30%] q-on-q and what has been the sight on the cost of deposits, the cost of deposits have moved during the period?

Okay. So the only element of operating revenue which are lower in this quarter are essentially the FX revenues which have grown at 8% against in the mid-teens which of course tends to be a little more volatile than some of the other lines, but again that is -- being slightly slower growth rate.

The net interest income growth rate is slightly higher even if you knock out the dividend element because of what has happened to margins and the loan growth.

As far as the deposit price is concerned, the only way, as you can imagine, the reason why the margins have held up at 4.2% vis-a-vis 4.1% if you compare it on a corresponding quarter of last year basis then that, it is not reflective of the fact that deposit growth -- deposit costs would have also come down proportionately.

When you look at the previous quarter and -- when we spoke about the base rate and so on that was really a function of the first quarter of last year to this year -- to this quarter of the year. The total deposit costs therefore have also more or less in line with loan yields and therefore we've sort of (technical difficulty) has obviously been on the back of time deposits, time deposit rates coming down. Of course, the benefit of that has been probably around [half a quarter] because fixed deposit rate started coming off somewhere in the middle of the quarter.

Yes.

Nonetheless, there has, therefore, been a decline of about little over 10 basis points in the deposit costs.

Okay. And I was [again referring to] our operating profit just for the first time in 15 quarters have declined. Does it worry you or do you think that -- I think your point that your other income from ForEx (technical difficulty) the last quarter?

Yes. So I think the -- it does not -- given the line which it has come from, I think the (technical difficulty) to have had higher FX revenues, of course. But to the extent that we've seen the volumes largely holding up and in terms of the customer volumes on FX. The slightly [thinner spreads] on some of those we can understand given the low volatility. The slightly lower crop revenue, again, given the volatility there can be understood.

So, yes, there is some quarter-to-quarter volatility on FX revenues. But if the decline had come in core net interest income or in fee income which are our customer [clientele] those would have certainly been a -- a matter of [data] concern than something which is inherently volatile. And again, as I said on the provision side, it's -- the fact is that the provisions are lower, also given just the fact that our NPAs have come off. So it's not at the cost of coverage coming off, or therefore, which would then have meant that we were sort of compromising on the quality of the (technical difficulty) ratios.

Yes, fair enough. And I have a last question if you may?

Sure.

Last quarter in the analyst call, Paresh you had mentioned that you probably thought not just in terms of an asset, especially in the retail side, you were (technical difficulty)?

(technical difficulty) Shri Shankar there is -- this is the second time it's happening. The voice is sort of coming on and off, so I'm missing out like half the words in the sentence. So --

Okay.

Is there -- the operator, can you just [reach] that it's -- is it -- if you can just repeat the question, if you don't mind?

Yes. My question was, if you -- if I take you back to your last quarter conference call, you mentioned that in the retail side probably were expecting increased delinquencies in this quarter, or the best of the scenario was over? In reality, we have actually seen that's not happening. So, are you comfortable with the asset quality right now, especially in the retail side and that fear that you had in the last quarter has gone away?

No, (inaudible) I think, I would still be cautious in terms of holding out on what happens in asset quality, because the environment is still challenging and we've not seen a huge sort of bounce back to rapid growth or some of the concerns which exist in the environment have not gone away. So, yes, we are sort of extremely happy that the portfolio quality is holding up. We are focusing on the area that we believe we've done well that we continue to strengthen that and others which we sort of see any signs of (inaudible) sort of being focusing on ensuring that we make corrections where required.

But I can't say that we believe that things are hunkydory and that there's no concerns on asset quality, I don't think that's fair from our reading of the environment. (technical difficulty) while I explain to you on what you mentioned in terms of the operating profit or operating revenues, my colleagues here say that this -- since you mentioned it in the first time in whatever 13 or 15 quarters apparently it has happened a couple of times in the past though I think [just three years]. Over the last three years, it's happened some three quarters or whatever, which is just putting the statistics right, the rationale of it, I've already explained to you.

Okay, okay. Paresh, thank you.

Thanks.

Thank you, sir. Nilanjan, BRICS Securities.

Hi. Thank you, Paresh. Just one quick question (technical difficulty) home loan you said, could you explain what's the new terms of agreement are?

Sure. So just to put this into perspective, the main change which was necessitated between the arrangement that we had and what we have now is that earlier when we would buy a portfolio, we would buy this on a credit enhanced rated basis. Such that if there was any loan, which would go bad from the portfolio that we purchase, that cost would get borne or that would get dipped into because of the credit enhancement, which was provided. And therefore there would be no credit cost to the buyer, which is us. Under the new guidelines, when we buy a portfolio under the loan assignment rule, we cannot be given a credit enhancement or any sort of a [credit recourse].

And therefore to that extent, the loan losses now would (technical difficulty) account. So that's the background of the change. Like-for-like, between what we had earlier in terms of the fees that we were paying therefore or the effective cost that we were bearing to now, there has been a reduction of 30 basis points and that 30 basis points would cover any credit cost that we would incur on account of the loans that have been of course underwritten by HDFC when they were purchased. From HDFC's point of view there is no credit enhancement that they are providing. They effectively get a whatever release of capital that they would otherwise have committed for the enhancement that they would provide.

Also as part of the new arrangement there are no activities that as a buyer we are required to do, which earlier we did not need to do in terms of some KYC and certain other operating requirements. So there is some amount of operating cost that comes into our books which perhaps is a saving for HDFC. But essentially like-for-like, relative to what the commercials were, we would now incur a lower whatever payment to HDFC if you (inaudible).

Okay, so that's a total (technical difficulty) okay, okay. And just going forward, why were the loans that for example, you purchased a lot less in the last couple of years, would those also, if you have to or if you are allowed to buy the previous loans, which was done last couple of years, would that still fall under the (technical difficulty).

Whatever we have purchased in the past as per the arrangement that we had in the past, that we have -- whatever we have purchased we have got on (technical difficulty) enhanced basis. And the [climate] do not apply to, -- their guidelines essentially apply only prospectively. Whatever we now buy will be on the new terms which will have the lower, the 30 basis points lower payment and taking on credit risk.

Okay. And I'll ask you a different question. For example, you were allowed to buy 70% (technical difficulty). So let's say, (technical difficulty) 50% which would now need to buy those 20%, would there be --

It would still be whatever we now purchase irrespective of (technical difficulty) older origination or a now origination because the guidelines have come into effect and the guidelines are applicable to any securitization transaction that happens now.

Okay, okay.

And which is fine because effectively, it's just a question of -- I mean we ultimately are extremely comfortable with the underwriting, and the origination at large in any case. The question was to access, these were operating costs and the [credit] expertise that they have.

(inaudible) that we would have been comfortable picking the credit risk in that or cost in that (technical difficulty). But to answer your question, yes, any new transaction in terms of a purchase would have to be compliant with the new guidelines and therefore the new arrangement.

(technical difficulty) general provisions or what is the floating [out] effect?

Approximately [75].

75.

Yes.

Okay, that's all I have. Thank you.

Thank you, sir. [Udit], KBW.

Yes, hi, thanks for taking my question. Just had a question on your NPAs, could you provide the additions and reductions for the half year?

(technical difficulty) and given the gross movements. Actually it's sort of don't on a quarterly basis, give the movements of NPAs in terms of slippages and upgradations and write-off.

I was referring to the half year since you provide that in the Basel II disclosure.

Yeah, but we provide that on a full-year, on an annualized basis in terms of the movements. What we have provided is of course the actual gross NPA outstanding.

No, Mr. Sukthankar, I'm referring to the September -- if I'm looking at the September 11 Basel II disclosure document and that gives the movement of NPA's additions and reductions as well.

I don't have that readily available with me, but if it's very important (inaudible), it will there on the website or whatever, you will get it, but I just now don't have that number or that table with me, if there is one (multiple speakers).

That's fine. Just related question then. For the full year, just bear with me for a minute, I just want to give you an example. If in Q1, an account goes into NP, and by Q3, it becomes standard again, is that reflected as a separate addition and a reduction or is it just completely sort of removed altogether from the addition and reductions that you report in the annual report?

But if you look at the numbers that we were presenting till last year and we were saying that we were dealing with on a corporate basis, it would come in and out and it could get counted in both. On a retail basis, till last year, we were reporting moments in NPAs on a portfolio basis, which means we size the portfolio and the number of accounts and what were the additions, and the closing balance of the portfolio on a portfolio-by-portfolio basis, on an individual product portfolio basis and then we were giving the moments.

From this year, in fact, we are doing this on a contract-to-contract basis, so to take an example of what you just said, it would show up as an addition and then as a already -- and if the same account happen to move again second time, it would show up second time as a slippage.

So the clarification in terms of the fact that on the retail basis the moments were being shown on a product portfolio basis, but we are now moving to a contract basis, both for retail and corporate, of course, on corporate, it has always been booked, is the way the reporting would work for this year.

Okay, great. Okay. Thank you very much.

You're welcome.

Thank you, sir. Vibha Batra, ICRA Limited.

Yes. I just have a couple of questions on the retail growth. You said that mostly the credit growth is demand driven and possibly whatever is it (inaudible) grow at possibly exhibited higher than that. But if you look at some portfolios like CVP and also credit card and gold loans, your growth has been much in excess of positive versus (inaudible) and CVP, especially if you look at the sales, on [HCV] side, they're down substantially. So what explains this very, very significant growth, especially (inaudible) gold loan, the base is also quite significant.

Sure. So on the gold loan, as you rightly said, the base is very small, so the growth rate looks extremely high (technical difficulty). As far as the other products, the fact is that we have been gaining market share, specifically since you asked on the CVP piece, apart from the year-on-year growth, the reason why as of September the growth is even higher, this sort of really impact more of the sequential growth and not necessarily the year-on-year growth, is the fact that towards the -- something in March, we have done an inter-bank participation. So we had sold some of those loans which -- to an IBPC, which typically has a tenure of about six months. So those loans which had been sort of participated out for six months would have come back. So if you look at sequentially, the growth might look again a little higher, but since these loans would have been on our books a year back, the year-on-year growth is not getting distorted by (technical difficulty) IBPC.

But broadly if you look at products where our growth has been a little faster than the underlying system growth, of course the underlying system growth being sluggish is in numbers, there has been some price increases and so on which would have meant that in rupee terms there has been a slightly faster growth rate than in number of vehicles sold. The rest of it is essentially our having gained market share, and the reason for -- one of the reasons why we would have gained market share is that there are some questions that we were not present in the previous year that we now have a pretty strong presence in.

So if you look at the last year, year and a half, where we've easily added a couple of hundred or more new cities to our distribution. And apart from the new branches we would also have expanded on the retail asset side to a certain new location that we didn't have a presence in earlier, then those -- that higher coverage or the extended coverage would also help grow the loan book. So, that's really where our growth has exceeded the system growth.

Paresh, would you have dropped the lending rates also to (technical difficulty)?

I think, as a strategy, we have really if ever should have done that. So our pricing is never a card that we play to increase market share. We haven't done that at a time when perhaps the aggression in the marketplace was more intense. And it's certainly not something that we would do now or that we have been doing now.

But this, if you were to look at the break up of this, how much of this would be at HCV and LCV and CE?

It will probably be for us roughly, roughly in value terms maybe about a little more than half or around half and half on an incremental basis would probably be the break up movement.

Okay. And what explains a very significant growth in credit card portfolio?

Well, our credit card portfolio actually has been increasing at a fairly healthy rate for the last two or three quarters now. Again, there the -- with a large customer base of our own and almost 70% of the cards that we issue going to our own customers, we've sort of seen an increase in the number of cards and there is a seasonal and a (technical difficulty) up and down in terms of the actual spends and revolves. But given that our asset quality has been holding up extremely well on that particular product and we continue to acquire new customers, we've been comfortable growing that.

Okay. And this personal loan growth, will this be unsecured or secured?

Yes. Personal loans are unsecured loans.

And business banking?

Business banking are largely secured, they are essentially -- there wasn't capital to SMEs or loans against property to individuals or otherwise. So that, business banking is entirely secured.

And within business banking what will be the breakup of loan against property and [to bank]?

Roughly, maybe roughly 50-50.

Okay. And personal loans what would be the average ticket size?

I wouldn't have that off-the-cuff.

Okay. And other loans would they be secured or unsecured?

Well, I think the nature of the products probably are self-explanatory. I mean, auto loans, commercial B loans and so on. The other loans is a part of breakup of these retail loans.

Yes.

Those would have bits of both, because there [would] be some products which would be simple products like OD against FD or stuff like that and there may be -- but most of those would tend to be secure.

Okay, there is one NBFC that you have, so it has broadly [INR4,000 crore] odd asset. So what (inaudible)?

We do mainly retail lending in a range of products including loans against property and other products that we would do, do in different markets or different segments. So, they essentially are retail -- they essentially do retail lending.

(inaudible) done in the bank that --

The different customer segments that we cater to.

Okay. So, is the delinquency profile rate different for them?

May not be necessarily. If I may request you to restrict your questions, I'm sure there are others in as well if you don't mind.

Yes. One more question, and which is on credit provisioning that's the P&L item in relation to advances. If we see two years back that used to be broadly 2% of your advances, that's dropped in last two years. So, fundamentally what has changed that your credit costs have come down so significantly?

No, I think the 2% was at a time when we were completing the merger with Centurion Bank and we were essentially cleaning the portfolio that we had acquired. So this was probably in a quarter or two in mid 2008 and 2009 or June of 2009. So this is -- that was probably an aberration, other than that period it's ranged based on of course the rate of formation of NPLs and the rate of overall loan growth because that's what specific and general provisions are a function of.

Clearly, our asset quality in terms of gross NPAs from where it was at that point of time, which because at that point of time the peak gross NPAs themselves had taxed almost, well, 1.3% before merger, 1.7% after merger and had gone to almost 2%. From there, NPS today are at 0.9%. So that should explain why the specific provision would have come down sharply. The general provisions are really a function of the rate at which we have grown and the rates that RBI had prescribed at that point of time for general provisions have come down, especially on some of the retail loans.

As a flip to that, we had no floating provisions during that phase, (inaudible) would have at various levels, account cyclical floating provisions that we've been making.

Shall we take the next question?

Yes, please.

Amit Premchandani, UTI Mutual Funds.

Good evening, sir. I had a question on the securitization part, is there any confusion left about tax aspect of the deal?

There was never any confusion on the tax aspect. The [issues] on tax are relating to perhaps the PTC (technical difficulty). We have not done any PTC transaction for the last several years. In fact if we had done PTC route, then we could have [got fresh] enhancement it would have remained pretty much the way it is, but because of the uncertainty on the tax treatments, we've been doing this through the loan assignment route and where there has never been and even currently isn't any tax uncertainty that we are aware of.

And just we are hearing that the PTC route also opened, but some of the banks are taking the risk on the tax aspect of that. Are you also buying any [CV] kind of loans through the PTC route and taking it from the tax part of it?

It will be tough to generalize. I think generally speaking, we probably aren't, but if there is any specific transaction where we might have taken some indemnity and done something, I'm not fully aware of and I wouldn't be able to comment on it anecdotally, but generally as a principle, we haven't really opened up that particular way of acquiring rules.

And if we can just ask, your opinion on what could be a likely decision on the tax angle of the SPV route the PTC part.

I'm really no tax expert, but what my set of people need to -- people [handling] tax in the banks believe that this is an -- seems to be sort of an erroneous reading of this whole thing, because it does result in the double-taxation, which doesn't seem right, does not seem to be the intent or doesn't seem logical. But (technical difficulty) since it is currently in a matter of dispute and maybe even litigation, we have preferred to stay out of that route.

And so can you share with us the outstanding balance of the current account as of the 30 September?

The 30 September, the current account balance was INR41,600 crores. Sorry, sorry, sorry, I'm reading the wrong column, INR48,100 crores. And as I mentioned in the press release, there was roughly INR3,000 crores of one-off line debt, which is what I've (technical difficulty) that we mentioned, we have adjusted it for, as it happened, as you are aware, the last three days of the quarter were not working, banking working days. So, that's resulted in a slightly higher unusual float, which I've adjusted in the CASA ratio.

And in terms of the term deposit, what percentage of a term deposit would be like wholesale or bulk or maybe at the same rate, but still wholesale?

Only about 25% or so, 20% maybe, but maybe max 25% of the fixed deposits.

Thank you, sir, that's it from me.

This call was supposed to be for an hour. I think we have done maybe a little more than that, but if there is an odd last question, we could do that. How many questions are there? Otherwise, we probably have to end the call. Maybe I can take one last question.

[Jay Prakash, India Life Insurance]

Good evening, sir.

Good evening.

Most of my question got answered. Just wanted to know more activities on the retail side, like how many branches (inaudible) any other new products which you have been mentioning in certain branches (inaudible)?

See, I don't have the detail about how many branches we would be doing every single -- a particular product (technical difficulty). But the general way we go about it is that when you open a new branch that we would launch that particular branch with a certain number of products depending on what the location is. So maybe there would be some branches that we would launch with maybe two-wheeler loans, gold loans, tractor loans --

Okay.

-- in some other case. And then in the following few months depending on how the customer acquisition index particular region is, we slowly roll out other products. Separate from that, as independent of the branch roll out, there are certain retail loan products that we would extend in terms of certain geography because there's -- so we might have a blanket coverage of a particular state for the sake of laws on let's say auto loans or two-wheeler loans or something like that.

So there is no single strategy that the branch presence receives our offering of retail assets or the other way around. It really depends from product to product, but it should be fair to say that if you added up 200 branches in the last year and maybe almost 1,000 branches in the last two, two and a half years, it would be at least half of those branches that would not have had -- that would not yet have all the products. So there is this ongoing thing of adding new branches and adding more products in existing branches.

Fair enough, sir. Thank and -- thanks, and all the best.

Thank you, sir.

Thank you.

Thank you, sir. Shall we take the next question?

Okay. How many are there?

There are nine questions added, sir.

Okay. What we'll do is, if we can just have maybe a few questions -- let's restrict it to one question per person, so that we give everyone a chance, but very quickly I'll try and answer if there's an odd question. And if your questions have been answered, then that would be great. Let's just take a few more then.

Ganesh Jayaraman, Spark Capital.

Yes. Please go ahead.

Yes, hi. I was just wondering if you're seeing any communication from the government regarding the balances (technical difficulty) for the private banks and more for the PSU banks. Are you seeing any impact of that of late? I'm just trying to get a sense of that.

No, we haven't really seen any meaningful impact of that (inaudible).

Okay. Okay. That's it for me. Thank you.

Thank you.

Thank you, sir. Karthik, Espirito Santo.

Hi. (inaudible) just quickly, you touched upon the competitive scenario getting more aggressive in the retail banking space. Can you just elaborate how does this pricing is working in the market as of now? And on the select products whatever you have seen an abnormal activity?

I think there are two elements to this. One is, in the last few months with the (inaudible) higher focus on retail from a larger number of players than what was there earlier, perhaps a little bit on the rebound from some parts of wholesale not growing or for whatever reason, there has been an increased level of price-based competition, but it's still not an irrational market or it's not as competitive as we saw in the peak of perhaps the -- that we saw four or five years or three or four years back in some of the auto and other products. Apart from that, of course, you might see some short-term or tactical stuff that is done because we are entering into what is traditionally a festive season where volumes tend to pick up, which we don't know how much of that is really for a short period of time and how much of it is here to stay. But overall I would say the -- there has been -- and certainly an increase in the competition from a pricing point of view but I wouldn't say in any product there's a level of irrationality or something that would make the business unattractive.

Thanks. That's useful.

Yes.

Thank you, sir. Mr. Krishnan, Ambit Capital.

No, I think I'm done. I'm done. Thank you.

Krishnan, appreciate it.

Thanks.

Thank you, sir. Mr. Umang Shah, Motilal Oswal Securities.

Hi, Paresh, congrats. Good set of numbers. All of my questions have been answered. Thanks a lot.

Thank you.

Thank you, sir. Mr. Shyam Srinivasan, Goldman Sachs.

Yes, thanks. All my questions have been answered.

Yes. Thanks, Shyam.

Thank you, sir. Seshadri Sen, JPMorgan.

Hi, thanks all my questions have been answered.

Thanks, Seshadri.

Thank you, sir. M. B. Mahesh, Kotak.

One question, under the current Basel III have you formed any internal comfort levels as to what should be the ideal Tier 1 ratio for the bank, that would be all?

Well, we've obviously done some work in terms of (inaudible) I don't think we have got a number that we are willing to sort of put out in the public domain yet. As you know the actual roll out in terms of these higher requirements on tier one are phased out under the Basel III guideline. And therefore in the initial phases the bank would obviously want to have a certain buffer over that knowing that the requirement is going up and knowing that the bank does consume capital at a certain pace if it grows, it's risk assets faster than in the generation of capital. But right now at the tier one ratio of 11.4 since we are pretty long distance away from reaching that minimum comfort level. We haven't really sort of formally decided or put out what that comfort level or what that minimum threshold level would be.

Yes, thanks a lot.

All right.

Thank you, sir. Nikhil Poddar, Barclays Capital

Question has been answered. Thank you.

Thank you.

Thank you, sir. There are no further questions, sir.

Great. Thank you so much everyone. Really appreciate you all being on this call. And I do hope we've been able to answer your questions. Thanks and good night.

That does concludes our conference for today. Thank you for participating. You may all disconnect now.